Chapter 20

c

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run? a. the price level falls and real GDP rises b. both the price level and real GDP rise c. both the price level and real GDP fall d. the price level rises and real GDP falls

d

If the economy starts at point A, a short-run fall in output would be consistent with a movement to point a. A. b. B. c. C. d. D.

d

If the government repeals an investment tax credit and increases income taxes, a. real GDP rises, and the price level could rise, fall, or stay the same. b. real GDP falls, and the price level could rise, fall, or stay the same. c. real GDP and the price level rise. d. real GDP and the price level fall.

a

Recessions in Canada and Mexico would cause a. the U.S. price level and real GDP to fall. b. the U.S. price level and real GDP to rise. c. the U.S. price level to rise and real GDP to fall. d. the U.S. price level to fall and real GDP to rise.

a

Wages tend to be sticky a. because of contracts, social norms, and notions of fairness. b. because of contracts, but not social norms or notions of fairness. c. because of social norms and notions of fairness, but not contracts. d. None of the above are correct.

d

When taxes decrease, consumption a. decreases as shown by a movement to the left along a given aggregate-demand curve. b. increases as shown by a movement to the right along a given aggregate-demand curve. c. decreases as shown by a shift of the aggregate demand curve to the left. d. increases as shown by a shift of the aggregate demand curve to the right.

c

When the money supply decreases a. interest rates rise and so aggregate demand shifts right. b. interest rates fall and so aggregate demand shifts right. c. interest rates rise and so aggregate demand shifts left. d. interest rates fall and so aggregate demand shifts left.

b

When the price level falls a. The interest rate falls because people will want to hold more money and so sell bonds. b. Firms will want to spend more on new business buildings and business equipment and households will want to spend more building new homes. c. Both A and B are correct. d. None of the above are correct.

a

Which of the following shifts aggregate demand to the right? a. both an investment tax credit and a decrease in income tax rates b. an investment tax credit but not a decrease in income tax rates c. a decrease in income tax rates but not an investment tax credit d. neither an investment tax credit nor a decrease in income tax rates

d

Which of the following would increase output in the short run? a. an increase in stock prices makes people feel wealthier b. government spending increases c. firms chose to purchase more investment goods d. All of the above are correct.

b

An increase in the expected price level shifts short-run aggregate supply to the a. right, and an increase in the actual price level does not shift short-run aggregate supply. b. left, and an increase in the actual price level does not shift short-run aggregate supply. c. left, and an increase in the actual price level shifts short-run aggregate supply to the left. d. right, and an increase in the actual price level shifts short-run aggregate supply to the right.

a

At the end of World War II many European countries were rebuilding and so were eager to buy capital goods and had rising incomes. We would expect that the rebuilding increased aggregate demand in a. both the United States and Europe. b. the United States but not Europe. c. Europe, but not the United States. d. neither the United States, nor Europe.

a

Other things the same, an increase in the amount of capital firms wish to purchase would initially shift a. aggregate demand right. b. aggregate supply left. c. aggregate supply right. d. aggregate demand left.

d

Other things the same, an increase in the price level makes the dollars people hold worth a. more, so they can buy more. b. less, so they can buy more. c. more, so they can buy less. d. less, so they can buy less.

d

Other things the same, if the U.S. price level rises, then a. the supply of dollars in the market for foreign-currency exchange increases, and net exports rise. b. the supply of dollars in the market for foreign-currency exchange decreases, and net exports rise. c. the supply of dollars in the market for foreign-currency exchange increases, and net exports fall. d. the supply of dollars in the market for foreign-currency exchange decreases, and net exports fall.

c

Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate supply shifts right. c. aggregate demand shifts left d. aggregate supply shifts left.

c

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. This can be explained a. only by technological progress. b. only by money supply growth. c. by technological progress and money supply growth. d. None of the above is correct.

c

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire a. decreased consumption, which shifts the aggregate-demand curve left. b. decreased consumption, which shifts the aggregate-demand curve right. c. increased consumption, which shifts the aggregate-demand curve right. d. increased consumption, which shifts the aggregate-demand curve left.

c

The long-run aggregate supply curve would shift left if the amount of labor available a. increased or Congress abolished the minimum wage. b. increased or Congress made a substantial increase in the minimum wage. c. decreased or Congress made a substantial increase in the minimum wage. d. decreased or Congress abolished the minimum wage.

d

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%, then firms have a. higher than desired prices, which leads to a decrease in the aggregate quantity of goods and services supplied. b. lower than desired prices, which leads to a decrease in the aggregate quantity of goods and services supplied. c. higher than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied. d. lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.